The current state of Bitcoin scaling: What kind of system can be called L2?

Author: Botanix Labs

Original link: https://botanixlabs.xyz/en/blog/the-current-landscape-of-bitcoin-scaling

In the process of developing Botanix, we kept asking ourselves a question: Can a system built on top of Bitcoin really be called a sidechain or layer 2 (L2)? This is a complex question because from a technical point of view, based on current capabilities, Bitcoin cannot act as a true L1 to host L2 like other ecosystems. Typically, L2 relies on smart contracts deployed at the bottom layer to verify proofs. For example, in the Ethereum ecosystem, L2 verification is performed by a deterministic function in a smart contract, which is executed by all Ethereum nodes when processing transactions.

The situation with Bitcoin is both simpler and more complex. Discussions about L2 on Bitcoin are often confusing. Unlike Ethereum, which natively supports Turing completeness and expressiveness, Bitcoin's current capabilities are extremely limited, and there are subtle differences in what is technically possible and what is not. Because of this, systems built on Bitcoin do not actually have strict L2 or sidechain capabilities. So why do we prefer to call them "Bitcoin Chains" instead of extensions or L2? The reason is that these chains built on Bitcoin usually have independent operating logic and build their own ecosystems around it.

Bitcoin does not support smart contracts like Ethereum does. Any complex logic must be implemented through structures built on top of it. Therefore, Bitcoin itself cannot directly verify proofs or maintain the state of smart contracts. Most types of proofs are too large to be put on the chain - Bitcoin transactions are only allowed to carry 80 bytes of arbitrary data. Solutions like Starkware's m31 are highly specialized and closed. Even if you manage to publish some kind of proof or state update to Bitcoin, the process is more like optimistic rollups. But waiting a whole week for fraud proofs to be resolved is neither realistic nor acceptable, and relying on third-party bridges introduces delays and trust assumptions, both of which are not ideal in the Bitcoin native environment.

Interactions with Bitcoin are limited to unspent transaction outputs (UTXO) with ScriptPubKey and BTC transfer transactions. The OP_RETURN instruction can only carry 80 bytes of data and cannot support interactions with complex data structures at all. Because of these limitations, it is difficult for Bitcoin to have complete L1 support for L2 functionality unless there are major changes to the protocol (such as a hard fork). Such modifications not only require extremely high community consensus, but may also undermine the uniqueness and value positioning of Bitcoin as an asset. For example, proposals to introduce new instructions such as OP_CAT (such as CatVM) have not yet reached a broad consensus. Even if there is a consensus, it often takes several years for a BIP (Bitcoin Improvement Proposal) to be proposed and activated.

Because of this, Botanix aims to build on “current Bitcoin” rather than trying to force it to L1 or push radical protocol changes. This path is possible because we use Spiderchain technology and a network of coordinators. So, how far has the ecosystem being built on top of Bitcoin developed?

Background: The emerging landscape of Bitcoin Chain (L2)

Despite the above limitations, most projects still prefer to call themselves "L2" and use this term as a general label. One of the earliest projects to claim to be Bitcoin L2 was Stacks. Although Stacks anchors data to Bitcoin and interacts with BTC, it is essentially an independent blockchain with its own consensus mechanism. Another example is BounceBit, which is classified as Bitcoin L2 because it uses BTC in its consensus mechanism (along with the native token). But this is actually not accurate. From an architectural point of view, it is closer to a restaking model, running on its own chain, and Bitcoin's role is limited to indirect participation.

However, the vision of making Bitcoin "alive" - making it not just a value storage tool, but an asset that can "do more" - has long attracted the attention of many developers. With the new super cycle starting in 2022, this vision has become increasingly important. While Ethereum has risen about 4 times from bottom to top in this cycle, Bitcoin has risen 6 times despite being slower and more "clunky". This dynamic is very interesting, isn't it? It further strengthens Bitcoin's position as the dominant asset in the Web3 world.

 Source: https://app.artemis.xyz/

From the perspective of value utilization indicators such as TVL (total value locked) - which indirectly reflects the degree of use of the underlying assets in the ecosystem - Bitcoin's comparison with other networks is even more significant. TVL represents the value carrying capacity of an ecosystem, including both the applications built on its upper layer and the utilization of the underlying assets in the L2 running on the base chain.

Currently, Bitcoin’s TVL in decentralized applications is only $5.5 billion, while its FDV (fully diluted valuation) is as high as a staggering $1.74 trillion. This means that only a small portion of Bitcoin’s value is truly utilized on-chain. In contrast, Ethereum’s TVL in DeFi applications and staking infrastructure (such as Lido, EigenLayer, Rocket Pool, etc.) has reached $48.9 billion. Compared with its $228 billion FDV, a considerable proportion of assets are actively participating in the operation of the ecosystem.

In contrast, the gap is clear at a glance. Solana's TVL is also at a higher level than its FDV - $8.25 billion vs. $76 billion. You can tell by looking at the gap! Solana is $8.25 billion vs. $76 billion, while Bitcoin is $5.8 billion vs. a valuation of $1.73 trillion! This is exactly the embodiment of the huge growth potential of the Bitcoin ecosystem in terms of value utilization.

 Source: DefiLlama, Coinmarketcap

It’s a pretty stark contrast indeed, isn’t it? This just highlights the huge upside potential in the Bitcoin ecosystem — and it’s this potential that attracts protocol developers like Botanix to build projects on top of Bitcoin.

At the same time, there are also some factors that, while promoting technological innovations such as Botanix, may in turn slow down the development of the entire Bitcoin ecosystem. This "paradox" is reflected in the typical mentality of BTC holders: they are accustomed to storing their assets in cold wallets for a long time, rather than interacting with the protocol as frequently as Ethereum's DeFi users. Compared with Ethereum users who actively participate in activities such as staking, lending, and liquidity mining, BTC holders pay more attention to asset security, self-management, and highly adhere to Bitcoin's fundamentalist values.

This is also one of the reasons why many "synthetic BTC" or "cross-chain BTC" versions based on non-Bitcoin native chains have always been difficult to gain mainstream adoption. Bitcoin users generally lack trust in the ecosystem on non-native chains, believing that it is not something that is truly "anchored" to the Bitcoin network.

The intrinsic value of BTC is mainly reflected in its "long-term value storage" function. Data shows that currently about 60% to 70% of Bitcoin has never been transferred on the chain in the past year, and this proportion continues to rise, reflecting the solid existence of long-term holders (HODLers). In November 2024, the proportion hit a new high of 70.54%, although this value dropped slightly during the subsequent BTC price increase.

 Source: https://studio.glassnode.com/charts/supply.ActiveMore1YPercent?a=BTC&category=&zoom=all

In addition, the global trend charts of Long-Term Holder Supply and Spent Output Profit Ratio (SOPR) also show a trend of continued growth. This shows that Bitcoin is attracting more and more long-term holders, further consolidating the value of BTC as a "long-term wealth storage tool." The root of this trend is that the Bitcoin blockchain is currently the most decentralized, robust, trustless, and censorship-resistant network, and it is these characteristics that ensure that BTC has become one of the safest assets in the world.

 Source: https://charts.bitbo.io/long-term-holder-supply/ 

 Source: https://charts.bitbo.io/long-term-holder-supply/

From another perspective, these dynamic changes also suggest that new Bitcoin holders may begin to view BTC as a "circulating asset" rather than a pure store of value. But the question is: Are these users willing to deal with packaged assets (such as WBTC) or still prefer to use "native Bitcoin" more directly? To answer this question, we need to look at the current development trend of the Bitcoin Chains (Bitcoin Chain/L2) ecosystem in the above context.

The Bitcoin Chains (L2) ecosystem is taking off

Initially, the ecosystem development on Bitcoin far predates the history of Ethereum’s expansion through Layer 2. The Lightning Network predates Plasma by 3 years and the earliest rollups by 5 years, and has made progress in decentralized payment scalability. However, it inherits many design limitations, such as interactivity (users must be online to receive payments), payment routing complexity in multi-party scenarios, and complex deposit and withdrawal liquidity requirements.

Some of these issues are mitigated by another Layer 2 protocol called ARK. ARK introduces ASPs (Ark Service Providers) to settle payments between users in a private manner, while still allowing trustless redemption of Bitcoin on the main chain. However, ARK still faces interoperability limitations as it has not yet introduced a covenant mechanism, and its high capital requirements also make the protocol inefficient.

These previous Bitcoin-based chains were useful in payment scenarios, but still faced expansion bottlenecks and made few attempts to add additional functionality to Bitcoin. Subsequently, more complex and functional designs emerged. At the same time, some complex solutions were also developed in parallel: Rootstock was launched in 2015, and Stacks dates back to 2013. However, their development path was long.

Until two years ago, Bitcoin had a weak presence in decentralized applications. In early 2023, only a few hundred million dollars of BTC were deployed in DeFi - a drop in the ocean compared to Bitcoin's huge market value. But by 2024, everything changed. The earliest projects to try to introduce programmability to Bitcoin included Rootstock and Stacks. According to DefiLlama, in the first half of 2024, Rootstock hosted about $294 million in BTC, while Stacks hosted about $289 million, totaling $570 million. In 2024, with the entry of new players, the landscape of the Bitcoin ecosystem has undergone major changes. In February 2024, Rootstock and Stacks accounted for more than 94% of the total locked volume (TVL), but by March 2025, the landscape has become much more diversified.

 Source: DefiLlama data, en.coin-turk.com

Against this backdrop, by the end of 2024, Bitcoin’s on-chain total locked value (TVL) had surged more than 20 times—from $307 million in January 2024 to $6.5 billion in December, a 2,000% increase in one year. This is not just growth, but the real breakout moment for Bitcoin in on-chain finance. TVL began to rise in October 2024 and peaked at $7.39 billion in December. Why did all this happen?

 Source: DefiLlama

In 2024 alone, the Bitcoin ecosystem has grown by 600%, with the total locked BTC exceeding 30,000, equivalent to nearly $3 billion in assets actively used for various scaling solutions. The message is very clear - Bitcoin is evolving. It is no longer just a means of storing value, but is gradually becoming an indispensable part of the on-chain economy.

 Source: https://www.vaneck.com/corp/en/news-and-insights/blogs/digital-assets/matthew-sigel-vanecks-10-crypto-predictions-for-2025/

At the same time, the market position of Rootstock and Stacks began to decline, and they were gradually replaced by more advanced and functional protocols. Bitcoin's programmable layer solutions have exploded rapidly, pushing Bitcoin DeFi into a new era. According to data from L2Watch, there are now more than 75 Bitcoin-based projects under development, covering EVM-compatible chains, rollup solutions, and newly designed side chains. These projects have only one common goal: to release Bitcoin's huge liquidity and integrate it into the broader DeFi ecosystem.

 Source: L2.Watch data

As protocols diversify, the capacity of the Bitcoin ecosystem grows. This space has come a long way - from network overlays (such as Lightning) initially used for payments to today's complex chain ecosystem that provides multiple capabilities. But the key challenge is not only to build chains that can provide new possibilities for Bitcoin users, but also to preserve Bitcoin's native characteristics and security in the process. This is far more complicated than simply building cross-chain bridges or synthetic assets through a minting and destruction mechanism. Botanix solves this problem through Spiderchain technology and a network of coordinators to maintain a direct connection and continuity with the Bitcoin mainnet.

The evolution of these technologies has pushed Bitcoin from "holding (HODL)" to "yield": entering the DeFi and real-world asset (RWA) scenarios. Botanix's goal is to achieve this "intelligent use of Bitcoin" without leaving the Bitcoin main chain itself. Bitcoin chain solutions equipped with smart contracts now support on-chain lending, trading, and yield generation, and are gradually replicating Ethereum's DeFi system. This allows BTC holders to earn income or use BTC as collateral without relying on centralized custodians. As VanEck pointed out, this type of chain and abstract technology will transform Bitcoin from a passive store of value to an active participant in the decentralized ecosystem, further unlocking liquidity and promoting cross-chain innovation.

Conclusion

Therefore, Bitcoin is no longer just "digital gold" stored in cold wallets. We are standing at the starting point of a new era for Bitcoin. An era where Bitcoin's liquidity, security and trustlessness jointly reshape the decentralized financial landscape.

And the most exciting thing is that this has just begun.